describes one who gets up and starts a company, or "floats it." The use of the term implies some duty towards the company imposed by or arising from the position which the so-called promoter assumes towards it. The term is not necessarily confined to those who participate in getting up and acting for a future corporation, but includes those who, by the sanction of the managing agents, continue to act for it after its organization. So long as others than the authorized agents are permitted by the directors to carry on the work of formation with the consent of the latter, what is done by such persons is done as promoters. Nor is it necessary, in order to make out a case against promoters to show that at the time the acts complained of were done the organization of a company was actually contemplated; but it is necessary to show a fraud in injury to the company. For instance, where the charge is that property was disposed of to the company at an exorbitant price, it must be shown that the price was swollen and exaggerated purposely and fraudulently with the view of making the company pay promotion money in addition to the real purchase money, as understood between the parties.3

§ 662. Promoters entitled to profit fairly earned.—It must not be understood that promoters are to be held to the strict accountability of trustees of the company. As long as they act in good faith, they may lawfully make a profit upon the sale of property to the company. It is not sufficient to make a defendant liable for profits as a promoter to show that he was a vendor to the company and afterwards became a director. It is a

1 Emma Silver Mining Co. v. Lewis, L. R. 4 C. P. Div. 396, 497.

2 Ladywell Min. Co. v. Brookes, L. R. 35 Ch. Div. 400.

3 Arkwright v. Newbold, L. R. 17 Ch. Div. 301, 319.

good defence to show that he has acted fairly and honestly as an independent vendor.1

§ 663. Rights of the corporation herein.-Nevertheless, they hold to a certain extent a fiduciary relation toward the company, and must not deprive it of the opportunity of exercising, through fair and independent directors, an independent judgment on all matters affecting the interests of the company. The corporation,

1 Densmore Oil Co. v. Densmore, 64 Pa. St. 43; Lungren v. Pennell, 10 W. N. C. (Pa.) 297; Albion Steel & Wire Co. v. Martin, L. R. 1 Ch. Div. 580; Gover's Case, L. R. 20 Eq. 114; Foss v. Harbottle, 2 Hare, 489. See also, McElhanny's Appeal, 61 Pa. St. 188; Arkwright v. Newbold, L. R. 17 Ch. Div. 301. But a promoter cannot make an agreement with the vendor of property, that out of the price paid by the company he shall receive compensation or a bonus for his services in "floating" the company, without an understanding to that effect with the directors. Emma Silver Min. Co. v. Grant, L. R. 11 Ch. Div. 918; Bagnall v. Carlton, L. R. 6 Ch. Div. 371; Hichens v. Congreve, 1 Russ, & M. 150; Fawcett v. Whitehouse, 1 Russ. & M. 132; Short v. Stevenson, 63 Pa. St. 95; Emery v. Parrott, 107 Mass. 95.

2 Erlanger v. New Sombrero Phosphate Co., L. R. 3 App. Cas. A very similar case to that of New Sombrero Co. v. Erlanger was that of Pittsburgh Min. Co. v. Spooner, 74 Wis. 307; 42 N. W. 259. It was shown that the defendants, having obtained the right to purchase a mining option for $20,000 proceeded to form a corporation to make such purchase; representing to the persons who subscribed for stock, that the option would cost $90,000 and that having first induced third persons to subscribe for the stock on such representations, and to pay to the corporation the sum of $100,000 for their stock, the corporation then, through defendants, its officers, purchased the option nominally for $90,000, but paying, in fact, only $20,000, converting the remaining $70,000 to their own use and profit. It was held to be a case of trustees and agents of a corporation selling property to it on the one hand, and buying for it on the other, and making a profit for themselves by the transaction, and that, setting forth these facts, started a cause of action; that the suit was properly brought in the name of the corporation; and that it was immaterial that the sale and purchase were made at a time when defendants were the only members of the corporation, the stock not having been then actually allotted to the third persons, who were in reality interested in the formation of the corporation, and who had agreed to take the stock. In Eldred v. Bell Tel. Co. 119 U. S. 513; 7 S. Ct. 296, it appeared that plaintiff organized defendant, taking in four friends as stockholders. Before their stock was delivered, an arrangement was effected for the consolidation of the American District Telegraph Company with defendant, the former receiving 250 shares of the stock of the latter. These 250 shares were deduced from shares of stock previously allowed to plaintiff. Plaintiff had charge of and directed all these transactions. Plaintiff sues defendant on an implied contract for the reasonable worth of the 250 shares. Held, no contract; the allotting of the 250

after its organization, may elect whether it will adopt or repudiate contracts made on its behalf by promoters. But it cannot adopt them in part and repudiate in part.1 It is not chargeable with notice of such contracts, and is not bound by them until some act of adoption is done.

In all such cases it is necessary, in order to bind the corporation, that plaintiff shall show "either an express promise of the new company or that the contract was made with persons then engaged in its formation and taking preliminary steps thereto, and that the contract was made on behalf of the new company, in the expectation on the part of the plaintiff, and with the assurance on the part of the projectors, that it would become a corporate debt, and that the company afterwards entered upon and enjoyed the benefit of the contract, and by no other title than that derived through it." 3

shares to the Am. Dist. Tel. Co. being simply a new arrangement in the creation of defendant and distribution of its stock, and not a contract between defendant and plaintiff for 250 shares of stock.

In an action to make stockholders of an insolvent corporation liable for its debts, the finding of a jury that the property of the corporation is not, and was not at the date of incorporation, worth more than one-fifth of the value at which it was turned in against stock, though presumptive evidence of fraud, does not charge the incorporators with legal fraud where they are shown to have made their valuation honestly. Young v. Erie Iron Co., 65 Mich. 111; 31 N. W. 814. See also Chandler v. Bacon, 30 F. 538.

1 Penn. Match Co. v. Hapgood, 141 Mass. 145; 7 N. E. 22.

2 Munson v. Syracuse, etc., R. R. Co., 103 N. Y. 58, 75; 8 N. E. 355. In Gent v. Mfg. Co., 107 Ill. 652; s. c. 106; Id. 252, it was held that an insurance company might refuse to pay a loss incurred on a policy issued by its promoters before incorporation, though the loss occurred afterwards. See also, Georgia Co. v. Castleberry, 43 Ga. 187; Bluehill Academy v. Witham, 13 Me. 403; Re The Empress Engineering Co., 43 L. T. Rep. N. S. 742; Aldred v. North, etc., Ry., 1 Ry. Cas. 404; Hutchison v. Surrey, etc., Ass'n, 11 C. B. 689; Leominster, etc., Co. v. Shrewsbury, etc., Ry., 3 K. & J. 654. 3 Little Rock, etc., R. R. Co. v. Perry, 37 Ark. 164, 191; aff'd in Perry v. Little Rock, etc., R. R. Co., 44 Ark. 383; Munson v. Syracuse G. & C. R. Co., 103 N. Y. 58; 8 N. E. 355. Rule applied in case of a contract of promoters of a railway company to build wharves, etc., for a town, the court

Some cases have gone still further, and held that it is not within the power of the agents of the corporation, after it is organized, to ratify such contracts.1 The rule applies to dispositions of the shares of the prospective corporation, and to the employment of agents to procure subscriptions to the capital stock. After

its adoption the contract is enforceable by and against

saying: "If such secret or unexpected terms are to be held binding on those who take shares, the result may be ruinous to those who act on the faith of what appears on the face of the legislative incorporation." Ry. v. Magistrates, etc., 2 Macq. H. of L. (Scotch) 391; Stanley v. Chester, etc., Ry., 1 Ry. Cas. 58; 9 Sim. 264; aff'd in 3 M. & C. 773; Petre v. Eastern, etc., Ry., Id. 462; Pierce v. Jersey, etc., Co., L. R. 5 Ex. 209, holding subscribers not bound by agreement of promoters to pay salary of an engineer employed before full subscription to capital stock had been obtained. The promise of one of the promoters of a bank that the bank, when organized and chartered, will pay a person for his services in procuring subscriptions to its stock, does not bind the bank. Tifft v. Quaker City Nat. Bank (Pa.), 21 A. 660.

But in Grier v. Hazard, Hazard & Co., 13 N. Y. S. 583, it was held that a corporation, in contemplation of formation at the time work was ordered by one of its incorporators, and which went to its benefit, is liable therefor. The right of members to protect corporation from contracts made on its account and in its name prior to incorporation fully considered. Supra, $634.

1 See Re Empress Engineering Co., 43 L. T. Rep. (N. S.) 742; Re Cumberland Ave. Hotel Co. Ltd., Sully's Case, 54 L. T. Rep. N. S. 777; Eley v. Positive, etc., Co., L. R. 1 Ex. D. 20; Re Rotheram, etc., Co., 50 L. T. Rep. 219; Payne v. New South, etc., Co., 10 Ex. 283; In re Empress, etc., Co., L. R. 16 Ch. D. 125. In Stanton v. N. Y. & E. Ry. Co., 59 Conn. 272, it was held that where a contract made with the promoters of a company was ratified by the company after its incorporation, such ratification related back to the date of the execution of the contract, and entitled plaintiff to have his services rendered prior to the ratification considered in estimating damages for the company's violation of the contract.

2 Morrison v. Gold, etc., Co., 52 Cal. 306; Eldred v. Bell Tel. Co., 119 U. S. 513; 7 S. Ct. 296.

8 In N. Y., etc., R. R. v. Ketchum, 27 Conn. 169, the court said :-"Can a few persons combine for their own interest to get up a railroad, agree with one of their number to give him a large commission or bonus for every stockholder he can allure into the company, and privately make this commission or bonus a charge on the corporation when formed? This would be a breach of faith towards honest and unsuspecting shareholders who pay the charter price for their stock and expect to take it clear of all incumbrances."

the corporation. But it is held that there must be an express adoption.2

§ 664. When agreements between incorporators enforced. -A somewhat different rule applies where the incorporators have, before organizing and by way of compromising their differences, entered into agreements with themselves. Equity will enforce such agreements if reasonable, but will refuse to do so when to give them effect would operate as a fraud upon the subscribers not parties to the agreement and the corporation.*

1 Bedford, etc., R. Co. v. Stanley, 2 J. & H. 746. The mere fact that the corporation was organized in reliance upon the contract gives it no rights, it not appearing that defendant requested the corporation, or that the incorporation was otherwise made the consideration for defendant's promise. Penn. Match Co. v. Hapgood, 141 Mass. 145; 7 N. E. 22.

2 See English Cases collected in 3 Ry. & Corp. L. J. 482. An order made by directors for the issue of bonds authorized by resolution passed by promoters before incorporation held to be an adoption and to render the bonds valid. Wood v. Wheelan, 93 Ill. 153. As to what amounts to adoption, see McDonough v. Brick, 34 Tex. 309; Paxton v. First Nat. B'k, 21 Neb. 621; 33 N. W. 271; Whitney v. Wyman, 101 U. S. 392, holding the corporation liable on acceptance of machinery purchased for it before incorporation. Reichwald v. Commercial Hotel Co., 106 Ill. 439; Grape, etc., Co. v. Small, 40 Md. 395; Battelle v. Northwestern, etc., Co., 33 N. W. Rep. 327; 37 Minn. 89; Spiller v. Paris, etc., Co., L. R. 7 Ch. D. 368. Payment of royalties on patents constructed by promoters is a ratification. Bonner v. Am., etc., Co., 81 N. Y. 468; Lorillard v. Clyde, 86 N. Y. 384,

3 Edwards v. Grand, etc., Ry., 1 My. & Cr. 650; aff'g 7 Sim. 337. 4 Preston v. Liverpool, etc., Ry., 5 H. L. C. 605. See also, Stanley v. Chester, etc., Ry., 3 My. & Cr. 773; Eastern, etc., Ry. v. Hawkes, 5 H. L Cas. 331; Earl of Lindsey v. Gt. Northern Ry., 10 Hare, 664; Earl of Shrewsbury v. North, etc., Ry., L. R. 1 Eq. 593; Gooday v. Colchester, etc., Ry., 17 Beav. 132. In Brewster v. Hatch, 122 N. Y. 349; 25 N. E. 505, it appeared that the promoters of a mining company, having secured an option on certain mines, issued a prospectus inviting subscriptions to a corporation about to be formed to acquire title to the mines, the stock of which was to be divided into 150,000 shares, of $10 each, a limited number of which were offered to the subscribers at $4 each, and further stating that the promoters themselves were to be the first officers and trustees of the company. They sold 61,000 shares, and with the proceeds thereof paid for the property, and then completed the organization and issued the stock. After distributing the shares subscribed for, and those given to brokers and others to advance the scheme, there remained 58,235 shares, which the